SCHOOL OF BUSINESS, ECONOMICS AND MANAGEMENT
ECF110 - INTRODUCTION TO MACROECONOMICS
MID-SEMESTER EXAMINATION
MONDAY, 11TH APRIL 2016
15:00- 17:00 HOURS
Time allowed: 3 HOURS plus 5minutes reading time
Instructions to Candidates:
1. Check that you have the correct examination paper in front of you.
2. There are Two (2) Sections in this paper. Answer ALL questions in BOTH section A and B.
3. All questions must be answered in the answer sheet only.
4. Write down the number of questions that you have answered on the cover of the examination
answer sheet.
5. Begin each question on a new page.
6. Non-Programmable Electronic Calculators are allowed
7. No books, files or other mechanical / electronic aids are permitted.
8. There shall be no form of communication between students during the examination. Any students
caught doing this will be disqualified.
DO NOT TURN THIS PAGE UNTIL YOU ARE TOLD TO DO SO
1
SECTION A. COMPULSORY
QUESTION ONE
(a) Which components of GDP would each of the following transactions affect?
(i)
Your family buys a new plasma TV
(1 mark)
(ii)
Your neighbour buys a new house.
(1 mark)
(iii)
All townships roads are repaved
(1 mark)
(iv)
You buy a bottle of Italian wine.
(1 mark)
(v)
Toyota opens a new factory in Zambia.
(1 mark)
(b) Consider an economy composed of only three firms: firm A, B and C. Firm A
takes wood from the forest at no cost and produces planks out of this wood. Firm
B, a manufacturing company, buys these planks from firm A and produces
wardrobes. These wardrobes are sold to firm C, a retailer firm who in turn sales
the wardrobes to consumers.
Firms
Quantity
Price
Wages
Taxes
Profits
A
250 Planks
$15
$2000
0
$1,750
B
50 Wardrobes
$300
$800
$2,750
$7,700
C
50 Wardrobes
$400
$500
$850
$3,650
Compute the GDP of this economy using the three (3) approaches to national income
(15 marks)
(c) World Bank has just hired you and you are tasked with the responsibility to rank
by GDP the following countries:
Country
GDP (in billion US dollars)
Population (in millions)
India
4,684
1,223.17
Germany
3,197
81.90
China
12,406
1,354.04
Canada
1,488
34.83
2
United States
16,245
314.18
i.
Using GDP value, rank the above countries in descending order?
ii.
Using your basic knowledge in macroeconomics, rank the above countries in
terms of their standard of living?
iii.
(6 marks)
Do you think China will surpass the United States any time soon in terms of
living standards?
iv.
(1 mark)
(3 marks)
In a speech of Senator Robert Kennedy gave when he was running for
president in 1968, he said the following about GDP:
(It) does not allow for the health of our children, the quality of their education, or the joy
of their play. It does not include the beauty of our poetry or the strength of our
marriages, the intelligence of our public debate or the intelligence of our public officials.
It measures neither our courage, nor our wisdom, nor our devotion to our country. It
measures everything, in short, except that which makes life worthwhile, and it can tell us
everything about America except why we are proud that we are American.
Was Senator Robert Kennedy right? If so, briefly explain.
(10 marks)
TOTAL: 40 MARKS
3
SECTION B: COMPULSORY
QUESTION TWO
The Zambia economy is currently in a recession and preliminary statistics from the
Ministry of Labour and Social Security indicates that between 2013 and 2016, the
unemployment rate in Zambia has risen from 13.3 percent to 19.5 percent. His
Excellency the President of the Republic of Zambia, Mr. Edgar Chagwa Lungu has
been presented with two policy options to address the unemployment problem by the
National Economic Advisory Council (NEAC).
Policy One: Use tariffs and quotas to restrict imports and this will protect jobs in the
Zambian economy.
Policy Two: Use monetary and fiscal policies to resolve the unemployment problem
without resorting to trade restrictions.
a. As an economic advisor to the president, explain two disadvantages of selecting
policy 1
(4 Marks)
b. Describe in detail one specific monetary policy action and fiscal policy action you
would recommend to reduce unemployment. Explain how each of these actions
would affect each of the following variables in the short run
i.
Aggregate demand
ii.
Output and price level
iii.
Real interest rate
(12 marks)
c. If the interest rate effects you identified in part (b) continue in the long run, explain
the impact of these effects on economic growth.
(4 Marks)
TOTAL: 20 MARKS
4
QUESTION THREE
Suppose a new government promised to eliminate the large Zambian budget deficit
within a year to ‘put the economy on a sounder path’.
(a). Describe some steps it would have to take on spending and taxes.
(b). What effect would this have on:
i.
National output
ii.
Tax revenue
iii.
The deficit
iv.
Autonomous investment
(12 marks)
(c). Why would government raise taxes when it could borrow to cover its spending?
Briefly explain and show by way of graphs.
(4 marks)
(d). Define the crowding-out effect.
(2 marks)
(e). Is the crowding-out effect likely to be larger during recession or when the economy
is near full employment?
(2 marks)
QUESTION FOUR
The following data summarizes some macroeconomic conditions of a country called
Copacabana.
Planned Investment (I)
I=$200
Government Purchases (G)
G=$400
Exports (X)
X=$100
Imports (as a function of income Y)
𝑀 = 𝒅+ 𝒎𝑌
Autonomous Taxes
𝑇̅ = $200
Autonomous Consumption
𝒂 = $50
Autonomous imports
𝒅 = $10
5
-Let 𝒃 denote the marginal propensity to consume of the country.
- In Copacabana there is an income tax: let 𝒕 be the income tax ratio.
- Let 𝒎 be the marginal propensity to import in the economy,
a) Show the multiplier of the Copacabana economy, as a function of 𝒃, 𝒕 𝒂𝒏𝒅 𝒎
(2 marks)
b) Assume
-marginal propensity to consume, 𝒎𝒑𝒄 = 𝒃 = 0.8
-marginal propensity to import, 𝒎𝒑𝒎 = 𝒎 = 0.1
-income tax, 𝒕 = 0.05
What is the numerical value of the multiplier of this economy?
(1 mark)
C) What is the level of autonomous planned expenditure of Copacabana economy?
(2 marks)
d) Calculate the equilibrium national income of this economy
(2 marks)
e) What is the level of government surplus, and of domestic private savings (S) in
this economy?
(2 marks)
Assume the ruler of Copacabana, Sir Alberto Sanchez, is considering reducing the
government expenditure to 𝐺1 = $300 so as to rid the economy of inflationary pressure
(f) By how much will equilibrium national income change?
(2 marks)
(g) By how much will tax revenue change?
(2 marks)
(h) By how much will consumption change?
(2 marks)
(i) What would be the new level of domestic savings, government surplus and imports?
(5 marks)
TOTAL: 20 MARKS
END OF MIDSEMESTER EXAMINATION PAPER
6